Sources:

(1) CRISIL1
(2) MarketLine (Data Monitor)23
(3) Other online news articles45678

Industry Structure Analysis – Steel Industry

1. Threat of Rivalry

Attractiveness
Low 2 3 4 High Remarks
(1)
(5)
Number of Competitors # 95% of the total finished steel production in India comes
from Non-Alloying Steel production.

There is a great deal of consolidation, mergers and

acquisitions happening (for instance: Tata Steel – Corus)9.

However, a careful analysis of the various product

categories within the steel industry (Appendix A.1) reveals
that the long product categories are highly fragmented
(Bars & Rods, Structurals, GP/GC Sheets) while the flat
products are competitive (HR Flats, CR Coils, Plates),
wherein the leading 4-5 players contribute to over 70% of
the production share.

On the whole, though SAIL leads with a 17% share

(Appendix A.2), the industry is competitive in the flat
product space but fragmented in the long product space.
Industry Growth # The Indian Steel Production has been growing at an
impressive 8% (CAGR) since 2003.

(a) India’s per capita steel consumption stands at 46 kg

(contrast this with the world average of 150 kg)

1
CRISIL Research: Steel Products, Annual Review, July 2009; CRISIL Research Steel Products Update: Feb 2010
2
“Metals & Mining in India: Industry Profile”, www.datamonitor.com, October 2009
3
“Steel Authority of India Limited: Company Profile”, www.datamonitor.com, September 2009
4
“Public Enterprises, Government Policy and Impact on Competition – Indian Steel Industry”, Indicus Analytics
(Prepared for the CCI), January 2009
5
“Steel Market in India: Companies set for expansion”, Deutsche Bank Research, September 2006
6
“Indian Steel – An Overview”, OECD Steel Committee Meeting, December 2009
7
“The Indian Steel Industry – An ICRA Credit Perspective”, ICRA Rating Feature, March 2005
8
“PriceWatch: The Monthly Review of Developments in Commodity Markets: STEEL PRODUCTS”, CRISIL
Research, February 2010
9
http://www.thehindubusinessline.com/2007/02/09/stories/2007020900590900.htm
 (b) The total production capacity is estimated to grow
(from the current 55 million tonnes) to 124 mt in 2012
and 275 mt by 2020

(c) Consumption Demand Trends show an upward surge in

demand, not only in the traditional growth-driving
sectors such as construction, automobiles,
infrastructure, housing and consumer durables but also
in power generation, petrochemicals and fertilizers.
Indian Demand is projected to rise to 200 mt by 2015.
Fixed Cost # Fixed Costs are on the high, with significant outlay in land,
mines, plant, machinery, steel production process,
transportation and energy. The current cost structure
(Appendix A.3) clearly shows this.
Differentiation, # Steel has primarily been a commodity. Though some
Switching Cost players (SAIL, Tata Steel) have branded some of their
offerings, most steel products catering to different
customer groups, are not differentiated.
Excess Capacity # Most of the large integrated steel producers as well as
global majors have announced ambitious expansion plans
over the next decade (Appendix A.4).
Overall Attractiveness Low (2)

2. Exit Barriers

Attractiveness
Low 2 3 4 High Remarks
(1)
(5)
Assets Specialization # Highly specific tangible assets; industry specific; captive
mines (in case of integrated producers)
Costs of Exit # High, as most of the players have huge strategic stakes in
it; Not much of exit options available
Overall Attractiveness Very Low (1)

3. Entry Barriers

Attractiveness
Low 2 3 4 High Remarks
(1)
(5)
Economies of Scale # As [Appendix A.3] shows, Fixed Costs are high in this
industry; Huge Players, especially the integrated producers,
with captive mines, highly cost efficient production
processes (Blast Furnace / Blast Oxygen Furnace) enjoy
huge economies of scale and scope (in production and
 marketing)
Product Differentiation, # Not much of product differentiation. Some of the big
Brand Identity actually brand their steel products (Tata Steel, SAIL 10, for
instance11); SAIL was one of the first to brand under the
name SAILMA.
However, most other players do not have strong brand
names
Switching Cost # Though some of the players have branded offerings, the
industry is largely commoditized and buyers perceive lower
switching costs between producers.
Access to Channels of
Distribution
Capital Requirement # The Flat Products are hugely capital intensive, with
substantial direct capital costs for developing
infrastructure for raw materials, transport logistics, storage
etc..

On the other hand, the long products are not capital

intensive.
Access to Technology # Integrated Producers have exclusive captive mines and
and Raw Materials have a huge advantage as compared to others.

On an average, the iron ore cost to steel companies with

total captive mining falls in the range of Rs.322 per tonne
for Tata Steel to Rs.558 per tonne for SAIL in 2005-06.

For a company dependent on partly captive resources such

as JSW Steel, located in a mining area, the costs were Rs.
886 per tonne.

For RINL, totally dependent on assured supply from NMDC

at government determined prices, the costs were in excess
of Rs. 1500 per tonne
Overall Attractiveness Moderate (3.3)

4. Threat from Substitutes

Attractiveness
Low 2 3 4 High Remarks
(1)
(5)
Availability of Close
Substitutes
Switching Cost

10
http://www.thehindu.com/fline/fl2516/stories/20080815251609600.htm
11
http://www.rediff.com/money/2003/may/03spec1.htm
Substitute’s Price Value
Profitability of
Substitute Producers
Overall Attractiveness

5. Buyer Bargaining Power

Attractiveness
Low 2 3 4 High Remarks
(1)
(5)
Number of Buyers # More, IA is high, BP goes down
Availability of # Low no of substitutes, IA is high, BP goes down
Substitutes
Switching Cost # Low, BP goes up
Buyer’s Threat of # Low, BP goes down
Backward Integration
Industry’s Threat of # High, BP goes down
Forward Integration
Contribution to Quality # High, IA attractive, BP goes down
Contribution to Cost #
Buyer’s Profitability #
Overall Attractiveness Moderate (3.5)

6. Supplier Bargaining Power

Attractiveness
Low 2 3 4 High Remarks
(1)
(5)
Number of Suppliers # Low, IA is low, BP of suppliers goes up
Availability of # High, IA is low, BP goes up
Substitutes
Switching Cost # High, IA is low, BP goes up
Supplier’s Threat of # High, IA is low, BP goes up
Forward Integration
Industry’s Threat of # Low, IA is high, BP goes down
Backward Integration
Contribution to Quality # High, IA is high
Contribution to Cost #
Industry’s importance to #
supplier
Overall Attractiveness Moderate (3)

7. Government Actions
 Attractiveness
Low 2 3 4 High Remarks
(1)
(5)
Industry Protection
Industry Regulation
Customs and tariff
restrictions
Overall Attractiveness

APPENDIX
A.1) Steel Production in India (approximate numbers) in 2007-08 (Source: CRISIL 12)

Indian Steel Producers: Share in Total Steel Production in India (all figures in %)
Each row corresponds to a specific steel product category
  SAIL TSL RINL Secondary Producers
        ESSAR ISPAT JSW Others
FLAT 32.8288 14.95 15.403 12.546
HR Flats 6 5 0 9 2 12.4228 11.8421
PRODUCT 34.9399 7.370 16.654 13.564
S HR Coils 3 6 0 3 6 13.4312 14.0392
Plates 71 2 0 19 5 0 3
18.2381 19.42 3.4172
CR Flats 9 7 0 0 8 10.9100 48.0065
CR coils /
sheets 22 23 0 20 20 7 9
GP / GC 5.23175 11.47 4.7957
Sheets 7 3 0 7 6.3790 17.439 54.6810
LONG Bars & 7.56880 6.187 12.744
PRODUCT Rods 7 6 3 0 0 0 73.4992
S Structural 13.0702 6.8028
s 1 0 5 0 0 0 80.12693
Railway 87.5690
Material 6 0 0 0 0 0 12.43094

Note: There are more than 700 secondary producers13; the “Others” mentioned above
hence indicates a highly fragmented group of over 700 secondary producers

12
CRISIL Research: Steel Products, Annual Review, July 2009; CRISIL Research Steel Products Update: Feb 2010
13
“Public Enterprises, Government Policy and Impact on Competition – Indian Steel Industry”, Indicus
Analytics, January 2009
 A.2) Overall Finished Steel Production Share (both alloy and non-alloy) 14

Steel Production
17

5
SAIL
RINL
1 Other PSUs
8 Tata Steel
Others

69

A.3) Company wise Costs of Steel Production (Source: Indicus Analytics Study 15)

Variable
Company Name Total Cost Fixed Cost Cost % of FC in TC
Essar Steel Ltd. 9606.53 4905.3 4701.23 51.06214211
Ispat Industries Ltd. 8611.64 5808.41 2803.23 67.44836059
J S W Steel Ltd. 8107.37 5565.22 2542.15 68.64396222
SAIL 34904.99 15488.98 19416.01 44.37468683
Tata Steel Ltd. 16204.41 6621.62 9582.79 40.86307369
RINL 8401.15 4755.09 3646.06 56.60046541

A.4) Capacity Expansion Plans of Major Steel Producers in India

Announced Capacity Expansion Plans (in million tonnes) (Source: Company News 161718, CRISIL)
Total Capacity of more than 50 mt to be added in next 5 years
Company Name 2009-10 2010-11 2011-12 2012-13 2013-14
Essar Steel Ltd. 4.6        
J S W Steel Ltd.   3      
SAIL   10      
Tata Steel Ltd.   3 3    
RINL   2.7 2.2    
Others
(includes global majors like
Arcelor Mittal, POSCO, 1.2 9 5.2 4.3 3
14
Same as above
15
“Public Enterprises, Government Policy and Impact on Competition – Indian Steel Industry”, Indicus
Analytics, January 2009
16
http://www.sail.co.in/investor.php?tag=investor_financials_annual, SAIL Annual Reports
17
http://www.vizagsteel.com/
18
http://www.tatasteel.com/investors/annual-report-07-08/annual-report-07-08.pdf
 etc…)

A.5)